OTTAWA, March 1 (Reuters) - Canada's current account deficit in 2011 dropped slightly from the record set in 2010 and is shrinking in proportion to gross domestic product, indicating the worst of the economic crisis may be over.

The deficit for the year fell to C$48.30 billion ($48.79 billion), the second highest on record after 2010's C$50.86 billion, Statistics Canada said on Thursday.

The 2011 deficit represents 2.8 percent of gross domestic product compared with 3.1 percent in 2010. It was the third consecutive annual deficit after a decade of surpluses.

The deficit for the fourth quarter of 2011 shrank by 16 percent to C$10.33 billion on higher exports to the crucial U.S. market, which is finally showing signs of recovery.

The figure, higher than C$9.40 billion shortfall expected by analysts, represents about 2.4 percent of GDP, down from the 2.9 percent seen in the third quarter.

"The improvement in the goods balance is consistent with a stronger than expected growth outturn in the U.S. economy through the end of 2011. We anticipate this momentum will carry over into 2012 and will bleed into Canadian growth," said TD Securities strategist David Tulk.

The overall balance on trade in goods in the fourth quarter jumped to C$3.13 billion from C$248 million. Exports of goods were up by C$6.68 billion to C$121.47 billion, the highest since the third quarter of 2008.

The services deficit edged up by C$60 million to C$6.16 billion on a lower commercial services surplus and a higher transportation deficit. The investment income deficit widened to a three-year high.

"The strong Canadian dollar, combined with sluggish global demand, suggests that current account deficits will persist through at least the next two years," said Douglas Porter, deputy chief economist at BMO Capital Markets Economics.

The Canadian dollar strengthened slightly after the data was released and at 10:25 a.m. (1525 GMT) was at 0.9841 to the U.S. dollar, or $1.016, up from C$0.9856, or $1.0146, at 8:15 a.m.

Separately, the RBC Canadian Manufacturing Purchasing Managers' Index showed the pace of growth in Canadian manufacturing picked up modestly in February after weakening the previous month.

Fourth-quarter economic growth figures will be released on Friday and the median prediction is for an annualized rate of 1.8 percent, down sharply from the 3.5 percent seen in the third quarter.

The Bank of Canada predicts real growth of an annualized 1.8 percent in the first and second quarters of 2012, before accelerating to 2.1 percent in the third, 2.6 percent in the fourth, and 3.1 percent in the first half of 2013.

Statscan also reported that higher prices for petroleum products and primary metals pushed up industrial product prices in Canada by 0.3 percent in January from December. The increase matched analyst expectations.

Raw material prices edged up by 0.1 percent, less than the 0.6 percent growth expected by analysts.

$1=$0.99 Canadian
Additional reporting by Jon Cook in Toronto; editing by Rob
Wilson